President Bush unveiled an aggressive initiative Monday that would make the U.S. free of petroleum dependence by the year 4920, less than three millennia from now.
"It would be a shame if, by the 33rd century, these bills were still tied up in committee. I urge the 712th Congress to pass this legislation with minimal partisan gridlock," Bush said.
The proclamation comes on the heels of Bush's plans to pay off the national debt by the early 6300s, and win the war on terror by 7450.
The price of oil per gallon is now between $2.60 and $2.75, at least in my area. At this price, a systemic shock to the economic system as a result of increased transportation costs is only too likely.
My father used to talk about the 'vicious cycle of inflationary capitalism' - rail,steel,oil and coal - these are the trusses of the economy, and have a much greater impact on everyday life than, say, the price of bandwidth.
Traditionally, higher oil prices lead to reduced economic activity. It is commonly believed that economies of the 21st century are less energy-dependent than before, which is certainly true to an extent. At current dollars, it would take the price of oil to rise to about $70 a barrel to match the 1970s price levels, yet we have seen little slowdown thus far. Interestingly, the declining nature of real wages and the rise in real estate prices makes it all the more unusual to see a prolonged period without economic distortion, and subsequent social change.
The effect can be more subtle than that, though. If industries and companies find it hard to raise prices either because of political or lowest-bidder markets, where customers are price-sensitive and prone to shop around for the lowest bidder, rather than exhibit brand or market loyalty, they will respond by cutting back on purchases, which has a significant ripple effect. Interestingly, it is often seen that prices fall during times of high demand. This is primarily due to a desire to protect existing markets and retain customers. Consumers react to raised energy prices by reduced discretionary expenditure. Apart from voting with their pocketbooks, they tend to forfeit control of their economic situation to the state, believing it more able to address the macro problems.
In a globalized world, however, the state is put into a quandary of epic proportions. On one hand, it must satisfy the interests of its citizens and manage inflation. On the other, it must interact in the comity of nations, each aspiring to meet the same goals. With regards to oil management, they are unable to do much, given the monopolistic nature of the market. OPEC is the 'oil manager' of the world, and is concerned with protecting its own interests, given social and governmental upheaval in the Middle East, and the threat of new technologies that could further reduce oil dependence. It's customers are therefore unable to respond effectively to their constituents.
The price of oil is also commonly believed to be set by the market - thereby subject to price elasticity on the demand curve. This is believed to be the cause for the decline in the price of oil to $10 in 1998, driven by reduced demand after the Asian financial crisis. Unfortunately, a market is only as good as it's managers. OPEC has proven, time and again, to be essentially incapable of evaluating supply and demand. It tends to increase oil production just before a drop in demand, as in 1986 and 1997, and threaten the reverse when demand begins to rise.
The most probable scenario is a combination of political and market reactions. Price controls would not work, and local oil production may not deliver the goods, therefore, governments will attempt to adopt a 'preferred buyer' model, where they will trade access rights to markets in exchange for greater control over oil. Markets, especially transportation and automotive industries will gyrate, tending to consolidate and issue warnings of failure, before an innovative white knight appears on the scene, in the form of viable alternative technology, or 'new resources' - just as industrialization and the 'New World' served as drivers in earlier waves of human growth. It is likely Stackelberg Warfare will ensue between incumbent 'home' firms and new entrants. This will lead to unrestricted economic warfare, as well as actual, physical wars to secure access to engines of growth. This is one of the reasons the WTO restricts export subsidies, recognizing that subsidies are an attempt to shift profits that can trigger retaliation and a lose-lose situation.
Another effect, and one quite likely in this newly globalized world, will be a realignment of economic forces to regions with greater bargaining power and demographic forces. During the last globalization boom, from 1870 to 1914, large economic gaps developed between the European industrial core and countries around Asia. It is possible to see similar shifts this time around, although it is unclear in which direction will the forces of capital flow. It must be remembered that the last boom brought with it the sinister and yet dextrous forces of colonialism, war, civil war and social upheaval.
The availibility, or the lack of it, of oil has never been the issue. As Sheik Yamani, erstwhile Saudi oil minister said once, "The Stone Age came to an end not for a lack of stones, and the oil age will end, but not for a lack of oil."
The oil age will end, in a few years or a few hundred - perhaps it might take as long as three millenia. 4920 AD sounds not too far off, really.
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